'When Money Dies': Moderation The Key To Money Printing

My summer vacation reading this year was “When Money Dies” by Adam Fergusson. Above the title, The Week called it “A timely warning of the potentially dire consequences when central banks hit the printing presses. Below the title—the subtitle—was “The Nightmare Of Deficit Spending, Devaluation, and Hyperinflation In Weimar Germany.”

I’d never heard of the book before my next door neighbor gave it to me on February 12, 2011. Checking occasionally, he has been disappointed that I hadn’t gotten around to reading it before now. One reason for his impatience, and possibly for my delay, I think, is his belief that we are going down the same road of massive money printing and hyper-inflation as occurred in Germany and its allies following WWI. I don’t think so, but his view would probably win the vote in our neighborhood.

Not to take away from the sound lessons of the book—that massive money printing leads to massive inflation and currency depreciation that can destroy an economy and a society. We are all familiar with the image of taking a wheelbarrow of currency to buy a loaf of bread, workers demanding wage payments daily so they can spend it before it loses more value overnight, wealthy families selling their grand pianos for food, jealous anger toward farmers for having their own food source, and irrational finger-pointing toward various groups thought to be responsible somehow for the general misery.

There is also the inexplicable (in retrospect) confusion over the cause and effect of money and inflation. Printing money increased prices while higher prices required more money to sustain purchasing power. The dog kept chasing its tail. The predominant view seemed to be that more and more money had to be printed to balance things out. No one in authority was there to yell, “Stop the presses!”

(Keynes tried, first at the British Treasury and later in his book, The Economic Consequences of the Peace.)

The strength of the book was to personalize all these travesties. Original sources, especially personal diaries, enable us to feel the pain of the times like no textbook could do. On the other hand, I got it long before the author was through feeding it to me. Hyperinflation is hell in almost every respect, and it was caused by the substitution of the printing presses for appropriate monetary and fiscal policies.

My problem was that readers would assume that we are on the same road to hyperinflation and dollar collapse. That, I assume, is the reason my neighbor was so anxious for me to read the book. I have no quarrel with the book, but I don’t think it describes the path we are on. We are not the Weimar Republic and the Federal Reserve (or the ECB for that matter) is not the German Reichsbank of the early 1920s. The warning is a useful reminder, however.

“When Money Dies,” it turns out, was originally printed in 1975; so, it was not originally intended as a warning about the dangers of QE1, QE2, or Operation Twist, even though monetary policy was not stellar in the 1970s. One can’t blame the author and publisher, however, for tying the two together in a subsequent printing to generate new interest. This passage is from the current back cover:

“Money may no longer be physically printed and distributed in the voluminous quantities of 1923. However, “quantitative easing,” that modern euphemism for surreptitious deficit financing in an electronic era, can no less become an assault on monetary discipline.”

Yes, it can, but, so far, quantitative easing has not resulting in money creation in “voluminous quantities.” QE1 and QE2 added to Federal Reserve assets and bank reserves, but not substantially to the money supply because of the banks’ appetite for holding excess reserves. One might say the Fed is “printing reserves” that lodge on the banks’ balance sheets, but is not “printing money” beyond what is needed. While the expansion of bank reserves has not translated into substantial monetary expansion, if bank reserves had not been expanded to meet bank demand, a balance sheet contraction would have been the dangerous alternative.

One can’t really blame the author or publisher of “When MoneyDies” for marketing it in the context of recent monetary developments, as opposed to the context of the mid 1970s. However, one should not automatically associate the money creation in the early 1920s with what has been done so far to get the economy moving in the past couple of years.

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